How will Windows 7 financially impact Microsoft?
Microsoft announced on Monday that it's planning to release Windows 7 for the 2009 holiday season. The operating system was originally slated for a January 2010 release.
Now that we finally have an idea when Microsoft will be releasing Windows 7, we can project its financial impact on the company. But we need to be careful. We don't know how the market will accept Windows 7. And we still aren't sure if the enterprise market will adopt it for existing machines.
Looking at past figures, we can develop an understanding of the impact Windows launches--and especially that of Windows Vista--have had on Microsoft's financial state and project that forward.
How important is Windows to Microsoft's financial performance? Will the Windows 7 launch play an important role in Microsoft's financial performance over the long term?
Let's take a look:
The importance of Windows
Microsoft breaks its operation into five segments: client (Windows), server and tools (Windows Server), online services (Live Search and other online services), business (Office and other enterprise tools), and entertainment and devices (Xbox 360 and Zune).
Over the past five years, Microsoft's client division has accounted for approximately 30 percent of Microsoft's revenue. More importantly, it has comprised 70 percent of Microsoft's operating income--a measure of how much of a profit a company has generated before interest and taxes have been paid.
For the quarter ended March 31, 2007--two months after the launch of Windows Vista--Microsoft's total Windows revenue was $5.28 billion. Its total revenue was $14.4 billion for the quarter. Its Windows operating income was $4.3 billion for the same period. And its total operating income for all divisions was $6.6 billion.
According to Microsoft, in its 2007 annual report, which encompassed July 1, 2006, through June 30, 2007, Microsoft's Windows division generated an operating income of $11.5 billion on total operating income of $18.5 billion.
As you can see, there's no debating that Windows is extremely important to Microsoft's bottom line. Without it, the company would be profitable, but not nearly as dominant as it is. If you need more proof, a Reuters report claims that Microsoft earned 75 cents of operating profit on each dollar of Windows sales in 2007. Wow.
(I should note that these figures do not break out the total amount of revenue generated from different versions of Windows. Microsoft prefers to report client figures on total Windows sales. However, knowledge of the time tells us that client division sales figures in 2007 were overwhelmingly Windows Vista and XP sales. Today the vast majority of sales come solely from Vista.)
Financial impact today and tomorrow
We know Windows is important, but how will Windows 7 impact Microsoft's financial performance? Once again, we need to take a step back and look at the company's performance when Vista was released in 2007.
The first quarter that accounted for Vista sales showed a slight uptick in Windows revenue. According to Microsoft's March 31, 2007, filing, the company's total revenue jumped by almost $4 billion over the prior year. Over $2 billion of that gain came from the company's client division. Microsoft's operating income on Windows jumped by $1.8 billion year over year, accounting for all but $900 million of Microsoft's companywide operating-profit gain.
By June 30, 2007, the end of Microsoft's 2007 fiscal year, the company reported that it sold more than 55 million Windows Vista licenses. For the year, revenue was up more than $7 billion, compared to its 2006 fiscal year. The company enjoyed a profit of $14.07 billion--$1.5 billion more than the prior year.
OK, but was Vista a success when it launched?
Although Microsoft's revenue and profit were up when the Vista launch was accounted for in its financial statements, there's no indication that it truly helped Microsoft generate more revenue than it might have without it.
When I compared Microsoft's revenue growth between 2004 and 2005, it grew by 8 percent, year over year. Between 2005 and 2006, Microsoft witnessed 11 percent revenue growth. It achieved 15 percent growth during its 2007 fiscal year, which was the year the company released Vista. Microsoft enjoyed 18 percent revenue growth during its 2008 fiscal year.
But much of that growth cannot be attributed to the company's Windows division, which averaged 15 percent year-over-year growth from 2004 through 2008. During that period, its servers, business, and entertainment divisions grew more rapidly, accounting for the majority of Microsoft's growth in revenue.
In 2005, Microsoft generated 50 percent more profit over the prior year. Its 2006 profit figures jumped just 3 percent. Its 2007 profit jumped a respectable 12 percent. In 2008, the company generated a 26 percent change in profit.
Although it didn't significantly change Microsoft's revenue, it seems that Vista's launch did contribute heavily to Microsoft's profit gains. The company's client division saw a 13 percent jump in annual profit during its 2007 fiscal year and an 11 percent jump in its 2008 fiscal year. For the two years prior to Vista's launch, it averaged just 4 percent and 7 percent profit gains, respectively.
The bottom line on Windows
So what's the takeaway? Historically, Microsoft has enjoyed relatively steady revenue growth, regardless of the version of Windows. Dating back to XP's release in 2001, the company's revenue has not changed drastically when a new version of Windows hits store shelves.
Microsoft's business division, which includes Office and other business-oriented applications, has generally been the driver behind revenue increases for the company. In fact, it has generated more revenue than Windows for the past five years.
But it's Microsoft's profit that feels the lasting effect of Microsoft's client division. The company's profits might have grown year over year, but when a new version of Windows is released, the percentage growth has historically been almost twice as high for the fiscal year the operating system hits store shelves. After that, the company's profit growth percentage declines until another operating system is released.
The bottom line on Windows 7
Looking ahead, we should expect the same impact on Microsoft's financial statements from Windows 7. Since Vista's release, Microsoft's revenue growth has stayed relatively constant (with the exception of two revenue slides, which were the result of the recession). Its annual profits have followed historical performance--strong growth at a new Windows launch, followed by slower growth until the next Windows hits store shelves.
So when Windows 7 is released this holiday season, we shouldn't expect much. There will undoubtedly be a jump in profit. And although revenue will grow with it, I doubt that it will grow at an annual rate that is higher than the company's historical averages.
If we use history as our guide for the future, Windows 7 won't drastically change Microsoft's financial performance. After a few years, its revenue growth will probably stay constant, and its profit gains will return to their average levels.
But the beauty (or is it horror?) of business is that history can't always predict unforeseen circumstances. So keep in mind that although Microsoft's financial performance has stayed relatively uniform over the past 10 years, it might not stay that way over the next decade.
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Don Reisinger is a technology columnist who has written about everything from HDTVs to computers to Flowbee Haircut Systems. Don is a member of the CNET Blog Network, and posts at The Digital Home. He is not an employee of CNET. Disclosure.
Despite the marketing and release name, Windows 7 is a 6.1, just as XP was 5.1. I think they've done the exact same thing. Take a really well defined core, that now has broad manufacture driver support, and make it more user friendly/happy.
What you do is called "wishful thinking". I have been hearing this same argument for about 15 years now. Every single year since 1995 has been the "Linux desktop year". Every single year there was another logo by a Slashdot fan where a smart looking penguin was crashing a dusty windows. Only in cartoons, of course.
The fact is Windows dominates the desktop even more than it used to dominate 15 years ago.
Accept the facts and move on. Linux will never be mainstream desktop. Never was, never will.
I've been using the Windows 7 RC since it was released, and so far, I've been quite impressed. I've been a Vista user for about 2 years up until now, and I have to say, 7 is looking very promising. I think it will have more success than XP in the long run. It's quite good.
Give those fields a try and you will see how much work it takes.
As for having to "re-learn a new OS" everytime you switch a distro, that's quite incorrect. To use mainstream Linux, you basically have two choices: Gnome and KDE. There are others (Xfce is nice, Lxde is good too, as well as *box) but that's not the point. The only difference between Ubuntu and Fedora that a mainstream user would see is the color scheme and the menus are a little different.
Microsoft also knows how to get peoples money (and furthermore them running Windows) better than anyone in the market. How else did they get everyone to agree on using their products? Therefore, the switch to Linux, when it does happen, will be slow and painful.
Just my thoughts...
There's probably not much growth to be had from Windows OS licenses. So long as the OS can support their other products and "keep up with the Jones'" (other OSs), it's fine. Pouring all the R&D that they do into development and new versions is merely to demonstrate that they are not stagnant.
Windows 7 will be a minor event from a fiscal standpoint (even a downer, considering the development cost) unless a lot more hardware is sold. However, it's absolutely crucial from the standpoint of demonstrating that they are competitive and evolving. The OS looking long-in-the-tooth would seriously damage their business.
I agree that most of the sales for a new OS would come from new machines being rolled out however there is still going to be a massive amount of OS upgrades.
Large numbers of new machines were using XP for compatibility and reliability especially in business environments. Any of those users willing to upgrade will do so once win 7 is out.
And not to mention the very large and yet steadily growing gaming market. Most gamers will want to upgrade to win 7 to get the latest DirectX and improved performance over vista.
And yes I also agree that the plummeting cost of hardware was a massive contributing factor to sales of OSs.
if the company understood anything about consumers it would make money from consumer products - but ti doesn't. it burns cash like there is no tomorrow in these areas.
its all about the windows and we all know that windows blows.... or is it suck? I can never tell....
OEM's have been offering Linux machines for years and the market for them is just not there.
"1999 called they want their argument back."
>> ROTFL.. couldn't have said it better myself..
Get ready everyone, the Linux funeral is coming this holiday - hallelujah!
Select System->Administration->Hardware drivers
Select Ati Driver
Click Enable
Click Ok
Really hard, isn't?
Not hating on ubuntu or anything but the drivers tend to be outdated by time they get to the updater.
Don't think for a moment that most people will use them because they are not that savvy and they prefer the simple click and go.
I have been beta testing W7K and find it much faster than Vista and even a bit faster than XP. I have it installed on an old PC with only 256MB RAM and it works fine, even with Office suite installed. The RC1 is much better and I am testing it on Virtual PC "sweet"
The bottom line is, leave it to each person to choose what he or she wants and stop the stupid bashing. The same for browers as well, use what float your boat but keep your negative thoughts to yourselves.
I'm sorry that you lost your contractor job at Microsoft. A lot of FTE's lost their jobs too. The economy has hit everyone including Google and Apple with workforce reductions.
It took me all of about twenty minutes I think to do a clean install of 7 RC1. And on top of that, everything "just worked" right out of the proverbial "box." Including my BFGTech GeForce 8800 GTS 320 OC powered dual displays. iTunes worked right from the get-go. Same with TweetDeck, AIM Lite and other various programs. And on top fo that, 7 absolutely flies on my box. The performance increase on the same hardware that ran Vista is phenomenal -- I'd be willing to say tenfold better.
All that being said, you give yourself away as a *nx elitest with your second sentence, last two complete sentences and final sentence fragment. So you opening statement is nullified.
1) We are in the middle of the deepest recession in the whole history of personal computing. This should definitely affect the impact of a new release, but we cannot even tell in which direction.
2) Vista was a market disaster. Yes, they got plenty of sales, but never before the latest mainstream Microsoft release didn't achieve a large market share before the new OS came out. People are still running XP, and XP was released eight years ago. It is quite likely a good percentage of those will want something newer if it is really better. And based on what I've seen, 7 appears to have good chances of being that upgrade.
3) Never before an OS released by Microsoft didn't require higher hardware resources than the existing one. This should enable tons of upgrades, both from people running Vista and people running XP.
4) Market penetration is so high that upgrades are now a significant percentage of the revenue. In 2001, even if all the existing machines upgraded to XP, that paled by comparison to all the machines that were sold in the next three years. In 2009, new machines sales have slowed to a crawl. Most everyone that can afford a PC already has one. A new OS might fire that up, but upgrades will be much bigger than in the past.
There are about one billion PCs in the world, with over half at specs that can run Windows 7 or could with minor upgrades. If one in two upgrade to 7 or buy a new machine, that's close to 25 billion dollars. That's a LOT more than what they are selling today in Windows clients.
So the conclusion is: if 7 does well, it will be hughe. If it fails, it will make the SEC reports flat.
Vista was a nightmare with 7 or 8 versions and grossly overpriced to get some pretty basic functions that are only available in the Ultimate edition!
Are consumers going to spend half the price of a new PC just to buy an upgrade???
"OS X is for artists, musicians, and creative people who don't actually do work, and Linux is for people who like to repeatedly bash their heads against walls in frustration because they can't find compatible drivers or workable programs (open source does not equate to better software)."
Windows 7 = Vista SPx there is nothing very exciting about it. MS will make money out of it of course but a double digit growth in profits? I dont think so. People are excited about smartphones and other portable devices, they are excited about the internet, both fields where MS does NOT shine.
MS needs to take a chill pill. They own the world, so they can afford to spend more time on this than they have in the past. I think rushing to get this out by the holidays is a HUGE mistake.
I wish everyone could make a pact. If this new OS does not perform perfectly out of the box the day it is released, stop buying all MS products and just try Linux or Mac. I swear you will be happier for it.
Dont be hatin guys, just be yourself and be happy with what u have. As long as whatever the os is, gets the job, that u want to do, done, it all good
- by Lenter101 May 12, 2009 5:51 PM PDT
- "Although it didn't significantly change Microsoft's revenue, it seems that Vista's launch did contribute heavily to Microsoft's profit gains. The company's client division saw a 13 percent jump in annual profit during its 2007 fiscal year and an 11 percent jump in its 2008 fiscal year. For the two years prior to Vista's launch, it averaged just 4 percent and 7 percent profit gains, respectively."
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Showing 1 of 2 pages (54 Comments)Looks like somebody has been buying Vista.
For all the 15 year old contributors who constantly talk about what a dog Vista is I say read it and weep.
I have used Vista on 4 computers since it came out and it has worked beautifully. The problem with a lot of the complainers is that they don't have any money for a new computer, think they know everything about computers, load a 2007 OS on a 2001 computer and when it doesn't work, they blame the OS.